Economic Geography: Theory, Integration and the EU. A Close Examination of the European Union, 1991-2001, and an Estimation of the Gains and Losses for the 2004 Union Expansion.

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Abstract

Economic geography takes into account often-neglected factors (distance and trade
costs), and also assumes a monopolistically competitive market structure. The results of
such analysis are two countervailing groups of incentives for both firms and workers:
agglomeration and dispersion forces. These two forces work to form a "U-shaped"
agglomeration curve, where agglomeration will occur only at mid-range trade costs.
With this analysis in mind the European Union, since 1947, has been on a steady course
of integration, altering the costs and benefits of firm location. This paper finds that since
1991 further integration has lead to a decrease in industry agglomeration, a movement
away from a core-periphery pattern of firm location. It is our estimation that with the
addition of the 10 ascension countries in the spring of 2004, this trend of declining
agglomeration will be reversed, at least temporarily, with the implicit 3-tier system of
core, semi-core, and periphery breaking down into the more stable core-periphery pattern.
This will result in gains for Ireland and possibly Greece, and losses in industry growth
and FDI for Spain and Portugal.

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